Navigating Africa’s banking, trading and foreign exchange landscape

Africa is quickly emerging as a hotspot for international development and economic opportunity. Many institutions and organisations across the globe are taking their first steps into the continent.

However, when it comes to Africa’s banking, trading and foreign exchange landscape, the lay of the land is alien to what many organisations know in more mature, Western markets and territories. Different considerations and priorities are required, and institutions can often find themselves not knowing where to start.

A local guide can make all the difference. More than in any other global market, forming genuine partnerships and connections with local and regional banks, institutions and regulators is crucial to success.

Issues of liquidity and volatility present a different set of challenges from the European or North American context. Someone who usually trades in euro/USD or sterling/USD is used to an environment where pricing is tight and movement typically small. But volatility for a currency like the rand represents a whole different ball game — the rate can easily move by 20c or even 30c a day.

In terms of the range of different hedging instruments available and the liquidity landscape for these across markets, there is tremendous variance. In SA, a relatively liquid market, you can transact in near any type of product and find offers quickly. But this is a market that, onshore and offshore, sees about $10bn (R147.8bn) move through it every day.

Go elsewhere and the picture changes dramatically. In Nigeria, for instance, the market is only about $150m–$200m per day. This represents such a tremendous difference in liquidity that even currency conversions and flows become difficult.

Another complexity worth noting is the question of what sort of multibank platforms are available. Many clients ask if they are able to use their normal aggregators such as 360T and FX-All across African currencies, and what the implications are in terms of efficiency of execution. The short answer is that for liquid currencies they are great platforms to use, but for less liquid currencies the equation changes.

For these you’ll get access to more and better pockets of liquidity through on-the-ground relationships with local and regional banks than what will be fed through an aggregator.

As well as being useful for rooting out pockets of liquidity in more niche areas, local connections and partnerships are critical for ensuring the process is made as seamless as possible.

SA itself is a country where most banks can operate without worrying about this aspect, so long as they are only looking for dollar-rand exchange. But only local and regional banks can really offer the full package.

The importance of local connections to a successful pan-African currency hedging function means that, more than usual, carefully selecting the right partnerships is key. In Germany, for instance, you can deal with 20-plus banks and be confident in spreading your business about. In Africa, this is far less the case — it’s important to be discerning about who to foster relationships with.

Regional and local banks typically have lower credit ratings than their Western counterparts, and transparency levels aren’t always ideal. As well as underlining the benefits of working with a local guide, this also shows why it’s important to form true partnerships as opposed to just seeing these banks as distant counterparties.

This links to issues of security and political volatility, both of which, again, form a distinct set of challenges in Africa as opposed to other more established markets. Part of the reason carefully choosing partners is important is the variety of sophistication available in terms of security and protection. Though there is a lot of excitement about disruptive fintech newcomers (and any innovation to improve speeds and process on the technical sides are of course welcome), established regional banks have much more experience in a market where the risks are greater than elsewhere.

In terms of political volatility, changes in regime can often result in changes in currency regulation. Even where regimes are more stable rules can sometimes suddenly change in arbitrary or non-market-driven ways that will be unfamiliar to those used to navigating European or North American markets.

While Africa’s FX and currency hedging landscape is complex, mastering it is central to any effort to capitalise on the astounding economic opportunities the continent has to offer. And there’s one clear thread running through the complexity — the distinct importance of forming deep partnerships with a network of local and regional banks and other financial and regulatory institutions. This, more than anything else, is the core ingredient of successful currency hedging on the African continent.

This article was paid for by Absa CIB.